Robert Gates had a meeting today discussing a re-organization of priorities of the military's needs and re-shaping the military. Cuts in F-22, but huge increase in Lockheed's F/35! LMT: +$3.50 http://online.wsj.com/article/SB123903026250593091.html?ru=yahoo&mod=yahoo_hs
I noticed this jump as well but am not quite clear on why it's happening. Why is the industry jumping on this news? As a general rule I thought the changes would be considered bad news as it is generally considered the Bush admin basically gave the defense companies a blank cheque. What in Gates' comments made the market move like this?
Legacy military platforms are being canceled, and/or cut in the numbers ordered. Defense Secretary Robert Gates unveiled a sweeping overhaul of the Pentagon's top weapons priorities that he said will orient the U.S. military toward winning unconventional conflicts like the one in Afghanistan rather than focusing on war with major powers like China and Russia. The priority is on C4ISR. Computers, communications, command, control, intelligence, surveillance, and reconaissance. All the kind of stuff that is needed to fight terrorism and insurgent groups. A great stock that does ALL of the above is L-3 Communications (LLL). Generates $1.2 billion in cash flow. Meanwhile, Lockheed's F/22 production gets halted at 187 jets. Years ago, that aircraft was supposed to have a production total of around 750. The "Marine One' helicopters for the President gets cut for being too expensive and 6 years too late. The Pentagon also stops purchasing Boeing's C-17 Globemaster at year's end and terminates the TSAT satellite program, awarded to Boeing and Lockheed. The Army's $200 billion Future Combat Systems program led by Boeing Co. and SAIC Inc. is being shaken up as Mr. Gates calls for canceling the ground vehicle components. That having been said, the F/35 JSF will see growth . . . increased from 14 jets to 30, which means the budget for that plane gets increased to $11.2 BILLION in 2010 from $6.9 Billion. Much of these "cuts" or "halts" were ALREADY in the stock prices. Just look at the chart patterns since last Fall. LMT +$5.00
I am thinking it is your last point that is moving these stocks. The point about increases in the JSF will only benefit LMT. Since the entire industry is up about the same amount I am assuming that news is irrelevant in this. I guess the changes everyone was expecting and had already priced in were not as damaging to the defense stocks as investors had expected.
The FY-2010 had already been agreed upon as +4% over 2009. Several analysts have been "negative" on the group, but the train is heading out of the station and these guys are making a lot of "poor" assumptions regarding defense budget trends. You have to read a lot of their research in order to gain some sort of a Street "consensus". Sanford Bernstein has had some EXCELLENT research out on the DoD Budget and the group over the last month or so. They are VERY bullish, and remind people that it is CONGRESS that decides as to which programs get cut, or move forward. I could go on and on about this group, but just don't have the time. Do yourself a favor and obtain the March 16th research piece by Doug Harned at Bernstein Research.
This realignment in defense spending does not surprise me one bit. When you look at the entire federal budget and you ask yourself where in the budget can significant cuts be most easily justified to improve the fiscal outlook, it is in the defense sector. The US is far out of line with other developed nations in two budget sectors, one is medicare/medicaid and the other is defense (We spend 2K$ per person, Germany spends $268). As difficult as it is to buck the defense industry lobby, it is even more difficult to buck the medical/insurance/AARP lobby. I am quite confident that those analysts bullish on defense beyond 2009 will be proven wrong.
First off, the FY-2010 budget is already in the books. It is a +4% INCREASE over 2009. There is an increasing priority by the Pentagon ( and the Administration ) on Special Ops, counter insurgency, ISR, and cybersecurity. There is also a huge "re-set" that needs to take place in our military given how old some of our platforms are. For example, did you know that the Air Force has a fleet of 550 KC-135 tankers, but that the average age is over 41 years of age ( as of 2001 )? Do you actually think that members in Congress are going to make the cuts that you suggest? We have a mid-term election coming up in 2010. There are also a ton of Blue-Dog Democrats that aren't going to make ANY cuts in defense. It also costs people jobs. Do you think that anyone with a defense contractor in their district is going to vote to cut the DoD budget? Think again. The 2012 Budget will be the first opportunity to reduce the baseline budget. But much of the impact of that budget won't be felt until 2013-2014 revenues and earnings. Defense contractors generate huge cash flows. They are trading at a discount to the S&P. They are a buy here, in my opinion. The world continues to be a very dangerous place. And you don't have to look at just North Korea to figure that out.
I have thought again, and yes I do think congress will, and i think the armed forces commander and chief will insist, and in fact can cause less money to be spent with the stroke of a pen. The money may be appropriated, but the commander and chief may say,"no, we don't need or want that." I think the cuts will come in advanced weapon systems and in bases on foreign soil. There will be few cuts in personnel.